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The Economics of Utility

Computing

Alan McSweeney

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Objectives

To discuss how the transition to utility computing can becost-justified by an organisation

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Utility Computing

Utility computing can be:

Within an organisation

Where users of computing services are charged based on usage

With a public cloud model

Where the organisation is charged for its use of computing services

Utility computing can replace capital costs and charges

Utility provider is responsible for providing computingresources

Users just draw them down and pay for what they use

Nothing new here think of computer bureau services ofold

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Utility Computing

Utility Computing is a better term than Cloud Computing

Describes the payment, operation and usage approach

Cloud computing implies technology and approaches toimplementation

Not just computing but needs to include other aspects of

information technology resources Storage

Data transmission

Service management

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Utility Information Technology Services (UITS)

Turn on/off the tap as requiredto access information

technology resources

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Utility Information Technology Services Within

Organisation

Business units accessinformation

technology serviceson demand and payfor what they useaccording to billingmodel

This requires thatthe IT functionknows and managesits costs and deliversinformation

technology servicescost effectively

IT Function

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Utility Information Technology Services From

Outside the Organisation Service provider enables delivery of utility IT services through

plumbing with appropriate service metering

Utility IT Service Provider

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Utility Computing Payment Models

Same range of charging models as other utility providers: gas,electricity, telecommunications, water, television broadcasting

Flat rate

Tiered

Subscription

Metered

Pay as you go

Standing charges

Different pricing models for different customers based on factorssuch as scale, commitment and payment frequency

But the principle of utility computing remains

The pricing model is simply an expression by the provider of the costs ofprovision of the resources and a profit margin

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Information Technology Processing Resources

Any computer system consists of

ComputingResources

Information Storage

Resources

InformationTransmission

Resources

External

Information isTransmitted froman External Source

Information isStored Temporarily

or Permanently

Results ofProcessing are

Stored

Information is Movedto be Processed

Results ofProcessing are

Transmitted

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Information Technology Processing Resources

This is what you pay for (because it is what costs money)

ComputingResources

Information Storage

Resources

InformationTransmission

Resources

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Utility Computing

There are significant differences between information technologyutility resources and those of other utilities

Gas, electricity, water and telecommunications are single resourcesthat you access Easily metered

Simple charging models

Providers are not responsible for how the product is used

Information technology utility resources consist of Computing Resources

Information Storage Resources

Information Transmission Resources Can requires more complex payment model

You need to know what you want, what you are getting and what itcosts

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Utility Computing Pricing

Any pricing model has to reflect the cost of recovery ofprovision of service

Capital cost

Operational costs including service management costs

Profit margin

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Paying for Utility Computing

Within an organisation

Do you know how much IT is costing so you can implement a utility supply and

payment model? Do you know what your costs are so you can charge for their recovery?

How mature is your costing model?

Could you implement a cost-recovery/chargeback model tomorrow?

Outside the organisation Any costs paid to an external utility provider are still part of the IT budget

Do you know if their costs will be cheaper or more expensive than internalcosts?

Are there hidden costs?

Can you disengage easily, quickly and at low cost?

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Coases Law on the Nature of the Firm

A firm will tend to expand until the cost of organising an extra transaction within the firmbecome equal to the costs of carrying out the same transaction on the open market

This means when it is cheaper to buy the service externally it will generally be bought

externally However there is an assumption of perfect knowledge and perfectly rational use of this

knowledge to achieve the most logical solution

In reality this perfection is rarely if ever achieved Other less rational factors affect the decision

Everybody Else Is Doing It

I Want To Do It So It Appears On My Resume I Like New Technology Vendors Keep Talking About It I Need One Good Idea To Stamp My Mark On The Organisation It Will Solve All My Problems I Hate Dealing With IT I Do Not Want to Setup a Large IT Function

Cost estimates are rarely accurate What we know about most projects is that they either or both overrun on costs and deliver less

than expected Cost overruns are generally caused by a mix of errors in the initial cost estimates and deliberate

distortions in order to cause the decision to be made

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Transaction Costs

Along with production costs, there are costs for preparing, entering into and monitoring theexecution of all kinds of contracts as well as costs for implementing allocation and trackingmeasures for the contracted services

When internal transaction costs become greater than the costs of externally sourcing theservice, the service will be obtained externally

There are hidden costs associated with sourcing a service externally Selecting the wrong supplier Costs of writing contract Costs of enforcing contract

Having a poor service contract that results in hidden cost and/or reduced service

Overlooking personnel issues Loosing control over the outsourced activity Management, quality assurance and supervision overhead Implementation and termination costs Loss of flexibility

Loss of integration between applications and data Data extraction costs Security framework implementation

Transition to utility computing model requires full knowledge of costs current and future

Note that anything can be outsourced except the management of what isoutsourced

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Characteristics of Credible Cost Estimates

Clear identification of requirements of the ultimate deliverable

Broad participation in preparing estimates

Availability of valid data for performing estimates historical,experience, benchmarks

Standardised and comprehensive estimate structure that includes allpossible sources of cost

Provision for uncertainties include known costs explicitly and allowfor unknown costs

Recognition of inflation

Recognition of excluded costs

Independent review of estimates for completeness and realism

Revision of estimates for significant changes in requirements

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Challenges of Developing Good Cost Estimates

Requires detailed, stable, agreed requirements

Agreed assumptions Access to detailed documentation and historical data for

comparison

Trained and experienced analysts

Risk and uncertainty analysis

Identification of a range of confidence levels

Adequate contingency and management reserves

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Reasons for Good and Bad Cost Estimates

Detailed,Stable,AgreedRequirements AgreedAssumptions

DetailedDocumentationandHistoricalData

EffectiveRiskandUncertaintyAnalysis

TrainedandExperiencedAnalysts

IdentificationofaRangeofConfidenceLevels

AdequateContingencyandManagementReserves

ComplexProjectorTechnology

UnrealisticProjectSavings

NewProcesses UntrainedandInexperiencedAnalysts

NoorLimitedComparisonDataAvailable

ProjectInstability

UnrealisticAssumptions Overoptimism

UnrealisticorUnreliableData

UnfamiliarTechnologyorFirst-TimeUseProblems

GettingAccesstoData UnreasonableProjectBaseline

IneffectiveRiskandUncertaintyAnalysis

Lost of reasons for and causes of inaccurate cost estimates

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Sources of Risk and Uncertainty in Estimating Costs

Lack of understanding of the project requirements

Shortcomings of human language and differinginterpretations of meaning of project

Behaviour of parties involved in the cost estimation

process Haste

Deception

Poor cost estimating and pricing practices

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Utility Information Technology Services (UITS)

What happens when the tapruns dry

You need to understand theoperating model

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Availing of Utility Information Technology Services

(UITS) Model

Need to understand existing and future IT costs completely

Need to understand the service model, its limitations androles and responsibilities of parties

Need to monitor and manage service provision

Works best for those information technology services thatcan be commoditised

Does not do away with the need for an IT budget, IT

function and IT management

Remember: Anything can be outsourced except

the management of what is outsourced

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More Information

Alan McSweeney

alan@alanmcsweeney.com